Money Wise Blog

The average American household has about $8,000 in charge card debt and many consumers are applying for a second mortgage and consolidating loans only to apply for more charge card accounts more and more. Young people are finishing college with lots of loan debt and carry this debt for years.

Why do we continue to overspend and put ourselves in debt? When a psychologist examines a patient and wants to find out why they have a certain problem, they usually look at their past and childhood. Financial trouble can definitely be traced back to their childhood.

Parents today focus on making sure their kids do well in school, don’t do bad things, go to college, and have a good career. Schools emphasize writing skills, math skills, and the arts.

I am not saying that any of these things are bad, by no means! I hope they keep working on and developing these skills. The problem is what they are not including in this list of important things to teach your kids. Most parents do not emphasize finance skills.

If a child becomes an adult never learning anything about money, they will use money based on their own experiences. Once they find out that they can exchange cash for the things that they love, they will continue to do so. Add in charge card accounts, and they now realize that they can get more stuff without even having to pay for what they want with money they had to work for.

Usually, these people become spending addicts and every time they get paid they’ll spend it on things they don’t need and won’t have anything left for what they do need. They will force them into debt.

We can try to prevent this by teaching them about money when they are young. Parents today need to teach their kids the value of money and how to budget, save, and spend money correctly in order to keep them out of debt.

If you are a parent, you should point them in the right direction and try to provide good guidance into money management. You can help do this at Teen Money Central which you can find more information about in the link in the bio section below. How do you teach them?

Don’t buy them everything they want. Give them an allowance, not attached to chores, so that they can learn to budget their cash and buy their own things. Encourage them to save. Have them open up a high interest bank account and deposit regularly to it so that they can see that it’s possible to earn cash with minimal effort.

Encourage them to apply for a job when they are old enough and have them spend their own money on things such as clothes, music, going out, etc. Teach them about investing and why it’s important to save for their future. Have them open up a custodial account to an online brokerage firm so that they can get hands on experience.

Don’t buy them a car. Have them save for their own car. Or, you can match whatever they save and put it towards their car. Teach them how to budget their money. Don’t give them a credit card account. Follow these ideas and watch your kids learn to handle their cash.

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The Federal Reserve has come up with some new rules to protect consumers from a list of abusive lending practices.  The changes aren’t in effect yet, and may not actually go into effect.  It’s worth looking at the proposals, though, to understand what’s been going on just lately.  If you haven’t been paying attention, you probably have no idea what the credit card account companies can legally do to you.
The things that would be prohibited would be:

Increasing the rate on a pre-existing balance

At the moment, there are pretty much no rules about this.  Your charge card account agreement most likely says how they calculate the rate–but it also says that they can change the agreement at any time, including the part on how to calculate the rate.  Many card agreements also provide for you to “decline” to accept changes–but if you use the card after they send out the notice of changes, that’s the same as accepting the new agreement.  And some cards don’t even offer that protection–they can raise the rate for any reason, or for no reason at all, and there’s nothing you can do about it except pay the new rate until you manage to get the debt paid off.

Applying payments to maximize the interest charges

Your credit card agreement says how they’ll apply any payment that you send in.  It matters, because parts of your balance are at different rates.  If you read the details, things are often set up to pay off low-rate parts of the debt first, leaving you paying on high rate debt for as long as possible.  Under the new rules:

Banks would be required to give consumers the full benefit of discounted promotional rates on charge card accounts by applying payments in excess of the minimum to any higher-rate balances first, and by providing a grace period for purchases where the consumer is otherwise eligible.

Imposing interest charges using the “two-cycle” method

The “two-cycle” method is a set of rules for calculating the interest owed in such a way that you don’t get any “grace period” if you don’t pay your card off in full every month.  If you carry a balance all the time, it doesn’t matter.  But if you usually pay your card off, but occasionally take an extra month to get back to zero, the two-cycle method can very nearly double the interest you pay.

The rules would also require that banks give card holders a “reasonable” amount of time to make payments.  It used to be that card holders got almost 30 days–basically, you had until the day they printed out your next bill.  Credit card companies, though, have been shortening the grace period, especially for their riskier customers.  For some cards, it’s gotten to the point where you really have to stay on top of your bills every day, in order not to be constantly late on your payment.

Of course, the only sensible thing to do with charge cards is to pay them off every month.  Charge cards are a great payment mechanism, but a terrible way to borrow cash.  Everybody knows that.  And these new rules wouldn’t really offer much to the people who do use their credit card accounts to borrow money.  

What these new rules would do is protect consumers who fail to run an error-free bill-paying and agreement-reading system.  As things stand right now, someone who pays every bill in-full, but who is only 99% successful at paying on-time, could easily end up owing hundreds of dollars in fees, penalties, and interest.  These rules would ease up some of the worst of the “gotcha” effect.  (And it certainly seems that some banks have been changing their rules specifically to set their customers up to make occasional small errors–and turn those errors into big fees for the bank.)

The rules are open for public comment.  No doubt the big banks will be commenting.  They’ll have statistics that show that customers who make a late payment are much more likely to default than customers who are never late.  Maybe a few consumers will comment about the basic unfairness of agreements that the charge card account companies can change at any time.

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Eliminating Debt Painlessly. Rarely do you see these words fit together in a neat little sentence. The very act of putting your hard earned money towards the stack of debts you’ve accrued is painful. The good news is you can snowball your progress against mounting debts if you do it the right way.

Let’s say you are juggling a number of debts, from student loans to charge card accounts to that loan your parents don’t expect to ever see repaid but won’t let you forget about either.

1. First things first: Write down each debt vehicle you have, the amount of the debt, and the rate of interest being charged. Department store cards are inevitably the worst culprits, charging annual percentage rates that border on criminal. Next in line are usually the charge card accounts, student loans, then lines of credit, and your parents (unfortunately) usually come last.

EXAMPLE:

Balance Owing Interest

Sears $500 28%

Visa $2,000 18%

MC $1,000 16%

Student Loan $6,000 10%

Line of Credit $5,000 8%

Mom & Dad $1,500 0%

2. Next: Determine how much money you have available each month to put towards all your debts. If you’re like most people on a tight budget you most likely haphazardly throw the minimum payment plus a bit at each debt every month, hoping that eventually it will all magically disappear. Unfortunately, making minimum payments on most charge card accounts is a sentence to upwards of 15 years of paying off that debt, and paying at least double the original balance in interest only.

EXAMPLE:

Balance Owing Interest Min Pymt

Sears $500 28% $16

Visa $2,000 18% $66

MC $1,000 16% $25

Student Loan $6,000 10% $150

Line of Credit $5,000 8% $90

Mum & Dad $1,500 0% $0

TOTAL: $16,000 $347

Total amount you can put towards your debt each month: $450

3. Choose the highest interest debt on your list. (I don’t care if it’s the highest or lowest balance, just look at the annual percentage rate). With the money you have designated towards all your debts, make ONLY minimum payments on all your debts, except your chosen highest interest debt, to which you put all the rest of your monthly allocation. Hopefully this is fair bit more than the minimum payment.

EXAMPLE:

Pay your extra $103/month to your Sears card in addition to the minimum payment, totalling $119/month.

4. Continue until your first debt is paid off. Now, you have one less debt to juggle each month. Yay! It may have taken a while to get here, but now you can cut up one card. No really. Cut it up. (Especially if it’s a department store card. They’re pure evil). The reason you got in this place to begin with is that you had too many cards, so let’s reduce the number you have.

EXAMPLE:

Sears is paid off in 5 months. Card is destroyed.

5. Choose the next highest interest debt on your list. Repeat the same process as in steps three and four. You’ll notice now, though, that you have more cash to contribute towards your next debt of choice, since you now have one less debt payment nagging at your pocketbook.

EXAMPLE:

Visa is next. Now have an extra $119/month since the Sears card is paid off, in addition to the minimum Visa payment. Your total Visa payments are now $185.

6. And so on. Each time you systematically pay off one of your debts, you’ll have more and more cash to pay off the next debt on your list, effectively snowballing the process of paying off your debts. It picks up momentum quickly, and by the end you’re blasting through your debts and even your parents get paid.

EXAMPLE:

After the Visa is paid off, you have $210/month for your Mastercard.

After the Mastercard is paid off, you have $360 for your Student Loan.

After the Student Loan is paid off, you have the full $450 for your Line of Credit.

After that, pay off your parents! It will only take you three months, and will get you in their good books for sure.

The total amount of time required to pay off this laundry list of debts: Under 5 years.

This is a long time, but think of it this way: Now you’re Debt Free! You didn’t have to toil every month over how much extra cash you can throw at the never-ending debt load, and you minimized every single dollar of interest you possibly could.

The trick is, you need to continue to allocate the same amount of money (or more) towards your overall debt every month until all your debts are paid off. If after tackling one or two cards you decide you can decrease your monthly allocation towards your debts, you’ll only prolong the process and end up paying a ton of interest. A little bit of short term pain makes for lots of long term gain. You deserve it!

CAVEAT: There are other debt elimination plans that would have you pay off the lowest balance first, instead of the highest interest debt. The reason for this is the feeling of satisfaction you get from knocking off a debt from the pile, even though you may be doling out more interest dollars on a higher balance elsewhere.

The wrong person without enough dedication to the plan outlined in this article might give up if the first few debts were slow to be paid off (for example, if your Sears card had the $6,000 balance, it would take you over 3 years just to pay off your first debt. That’s a long time to wait for tangible progress, even if it is the most efficient).

So take a look at your debts and ask yourself if you have the discipline to stick to the high interest plan. If not, try paying off a few smaller debts to get your legs under you and then re-evaluate. It’s a personal choice – not all cash matters are pure dollars and cents (I mean – sense).

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Debt is the hottest topic on personal finance blogs around the world. Why? I would venture to guess it is because so many consumers are drowning in it. The unfortunate truth is that few consumers care to read about debt until it has already had a negative affect on their financial situation. This can make the final solution to their debt problems even more difficult to hear about.

I’m no stranger to debt. I had been managing school loans, vehicle loans, and a few small credit card payments since I was 19, and I was successful in keeping a clean credit record. Then a few poor life choices left me responsible for over $30,000 in credit card account debt at age 24. With nothing tangible or memorable to show for my efforts, I could have become bitter. Maybe I could have filed for bankruptcy (this was before the laws changed considerably.) Ultimately, however, I chose to consolidate, reduce the rate, and pay those debts off early.

Why am I telling you all of this? Two reasons: (1) It lends credibility to my view on debt and repayment. (2) To keep you from throwing things at me when you read the next paragraphs:

The number one question I hear from people in debt is NOT: “What’s the best way to pay this off?”

It is usually: “How do I get out of this debt?”

Note that in their wording, they are usually implying that they are wanting to get out of their obligation of the debt, though not necessarily through repayment. Google searches for popular debt-related terms bring up scads of results for help in “Getting out of debt” — all of which seem to give a quick and easy way out. A few clicks and some reading will tell you, however, that the scheme is all the same, and repayment is almost always involved.

So to answer the question of “What is the Best Way to Get out of Debt?” — my answer is simple: Whatever way is quickest, easiest, and costs you the least amount of money, while at the same being perfectly legal and moral. Ditching your financial obligations by having a cousin co-sign while you walk away is NOT the best way. Making a conscious decision to default when you could be paying something (anything) is NOT the best way. Looking for answers from the sky for a way for you to not have to repay a debt (when you could if you wanted to) is NOT the best way.

I am saying this with the full understanding that someone reading this will have a unique situation that warrants blowing off a loan. I will guarantee that a handful of others will insist that they had no choice. I am, therefore, not talking to you, specifically. The $30,000 in debt that I repaid gave me zero benefit. It was the product of putting my name on a few accounts that were taken advantage of in the most grievous of ways. It would have been easy to say, “It wasn’t my debt,” default and start over 7 years later, instead of taking almost 6 to pay it all back. For this reason, I am speaking to the majority of those suffering from excessive debt who may not feel the benefit of their spending, realized they spent more than they could truly afford, or who simply got the short end of the debt stick. A loan is a loan, which is almost always best to pay back. Period.

I realize that if everyone paid back their loans, small claims courts would shut down, and debt collectors would lose jobs. Search Engine Optimization would change dramatically, and books on finance would lose their place among the Best Seller’s List. Thankfully, there will always be those who won’t pay up. But for the rest of us, there is still one answer to the debt problem: Make payments – no matter how small. As painful as it feels right now, no amount of cash can buy the integrity and honor of making good on a loan.

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The average American has around 8 charge cards and is carrying roughly $9000 in charge card account debt. If that’s not bad enough, the charge card companies are involved in what can only be described as a conspiracy to keep Americans in debt, permanently.

I watched an incredible PBS documentary online last night called “Secret History Of Credit Cards”. You can watch the 5-part eye-opener here at your leisure. But if you don’t have an hour to spare, here are some of the biggest dirty secrets for you. You may want to sit down for these.

Dirty Secret 1 – Minimum Payments = 35+ years of repayments.
The minimum monthly payment used to be 5%. That caused a problem for the charge card account issuers. Folks were being forced to pay off their balance too quickly, PLUS the cost of that 5% minimum made people wary of running up high bills. The solution was genius. Institute a 2% minimum payment. Not only will people splurge more because they have to pay less back each month, but it adds thousands of dollars in interest and increases the repayment time by DECADES. Sneaky doesn’t even cover it.

Dirty Secret 2 – A late payment to ANY creditor can skyrocket your interest rate.
I’m not talking here about just your credit card payment being late. If you miss a car payment, mortgage payment, cell phone bill, in fact any payment, your interest rate can automatically increase to the massive default interest rate, which is usually 25-35%. Even if you’re ON TIME with your credit card payments, a late payment anywhere else can instigate this penalty. It’s known as the “Universal Default Clause.” Supposedly, it protects the credit card account issuers from folks who are credit risks. Like these multi-billion dollar companies need protection from the little people.

Dirty Secret 3 – There is NO LIMIT put on late payment charges.
This is something no other industry could get away with. You’d think there would be some kind of law preventing the banks from charging loan shark penalties, but there isn’t. Be just one hour late for a payment and instead of a $5 or $10 fee (which, prior to the 1996 Smiley vs. Citibank case, was the limit), you’re looking at least $30. Mine charges $36. Many financial analysts believe that with no cap on these fees, they will easily rise to $50-$60 in the next year. And remember, when you’re late they’re also killing you with a huge interest rate. Double whammy.

Dirty Secret 4 – There is also no federal limit on annual percentage rates.
Don’t you find it odd that in a time of very low interest on anything from car loans to mortgages, credit card account companies can hand out interest rates that embarrass loan sharks. Well, it’s not unusual to see 34.99% annual percentage rates, especially as a default rate, and the reason is simple. Most credit card account companies reside in states like South Dakota or Delaware. States that have very weak or even no “usury laws”. So, there’s no cap on interest. By law, there’s nothing to stop them charging whatever interest they want. Here’s a map that links to the locations of top 10 credit card account issuers.

Dirty Secret 5 – You can often pay interest TWICE in one month.
This one’s called “two-cycle billing” and it’s also a completely legal loop-hole. Let’s say you pay off the balance of your card in full at the end of one month, say April. But in May, you don’t pay off your complete balance. Boom, some charge card issuers will charge you for two months’ worth of interest. Aren’t they lovely?

Dirty Secret 6 – Grace periods are getting shorter…or being eliminated.
Remember the good old days, when you had 25 days to pay off your balance without incurring charges? Well, those could soon be a distant memory. Some banks have already shortened the grace period to 20 days. (Do you know what yours is? It may have changed.) And other banks are doing away with grace periods completely. That means you’re paying interest on anything you buy, the second you buy it, even if you pay off your balance each month. The clock is running folks.

Dirty Secret 7 – Cash advances hit you twice in the wallet.
First, as I’m sure you know, you’ll get a different, higher interest rate applied to your cash advances. But you also get hit with a transaction charge, around 2.5%. Even credit cards that confidently announce “no finance charges” can still bill you for transaction charges.

Dirty Secret 8 – The fine print is a web of deceit.
Let’s be honest, these days you need 2 hours and a law degree from Harvard to understand the mumbo-jumbo in the fine print. But try and read it if you can. Because this is where the credit card issuer can hide a whole bunch of nasty surprises. The biggest is scarier than Godzilla on crack. Basically, the credit card issuer can change your APR at ANY time, as long as they give you 15 days notice. No reason required. Imagine if any other industry worked that way, like your mortgage? While you’re reading the fine print, also check for things like purchase protection, lifetime warranty coverage and travel discounts. These may end when your introductory rate ends. And speaking of that, what does your introductory rate become after the teaser period? It could be more than you bargained for, especially if it’s a variable APR.

Dirty Secret 9 – Good payers are called deadbeats!
Deadbeat – it’s what charge card account companies call those folks who are responsible and pay off the balance each month. They don’t like those consumers, not one bit. That’s because they make little to no cash off of them. No, charge card companies like you to carry a nice hefty balance and pay only the minimum each month. If you’re one of those consumers, known as ‘revolvers’, you’re part of the crowd that contributes roughly 90% of the charge card account company’s income. What a crazy upside-down world credit is.

Dirty Secret 10 – You can demand, and get, a better deal.
annual percentage rate too high? Hate the annual fee? Want a longer grace period? It turns out your charge card company may just have to do your bidding. See, the fees they charge are not considered a necessary cost of doing business, so you can request, firmly, that they be reduced or eliminated. Now, imagine what would happen if we all did that? No wonder they want that one kept secret. And remember, if all else fails, find a lower cost interest rate card and transfer your balance. You have at least that going for you.

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Annual fees, grace periods, balance transfer options…it’s a wonderful world of charge card account jargon out there, and depending on your needs and planned uses for charge cards, it pays to look at your options.

Following are the various ways in which charge card companies can get some money out of you:

Interest Rates

All credit cards levy an interest rate, the main difference being the percentage charged. Obviously you want to choose the card with the lowest rate. If you already have a card with a higher annual percentage rate but that you like for other reasons, then try calling and asking for an annual percentage rate reduction. According to a 2002 Public Interest Research Group study, 56% of people who called their credit card account issuer and asked for a reduction were successful.

Early Interest Posting Dates

If you are in the market for a new card, find out if interest is charged from the date the charge is posted, or the date of purchase. Most will now charge from the date of purchase (which is usually a few days earlier than the posting date), but if you can find one of the other kind, it may be worthwhile.
This is only really an issue if you plan to carry a balance on your charge card at any time, which if it can be avoided, would be preferable.

How Interest is Calculated

Some cards will charge interest on the balance owing at the month or billing cycle’s end. Makes sense, right?

Well, there is a growing trend now to charge interest instead on the average daily balance. So if you charge $1,500 in September, and pay $1,000 of it off on the due date, the following month you will actually be charged interest on the $1,500 average daily balance instead of the actual $500 left owing.

Grace Periods – or Lack Thereof

Usually, a grace period will allow for a responsible credit card user to pay off all their purchases within 24-30 days without paying any interest.

But as some readers pointed out in the comments on another article, even those dutiful charge card users who pay off their balance in full each month can sometimes get duped by circumstance (like the bank processing a transfer late) and miss the payment due date by a sliver.

For those consumers above and for those who regularly carry balances, even grace periods won’t save you: if you have an outstanding balance, you are charged interest on new charges from the date of purchase. (All the more reason not to carry a balance)!

Nuisance Fees

In a world of increasing fees for every little thing from booking airline tickets to doing your banking, credit card accounts are no exception to this bandwagon. The latest in nuisance fees can include:

Late payment fees (as high as $40)
Over-the-limit fees (as high as $25)
Inactive account fees
Not carrying a balance fees (or carrying a balance under a certain amount)
Monthly fees that are a percentage of your credit limit
Annual flat fees
Balance transfer fees
Credit limit increase fees
Set-up fees
Return item fees
Fees for paying by telephone

…and on it goes.

Cash Advance Interest Charges

Many cards charge higher annual percentage rates on cash advances in addition to transaction fees.

What They Have to Tell You About

When you are searching for a new charge card, the following items are required by law to be disclosed:

Annual Interest Rate (also called annual percentage rate or annual percentage rate)
The teaser or introductory rate, along with the details of when and how the regular rate kicks in
How the variable rate is determined (if applicable)
Penalties for late payments
Annual, periodic, or membership fees
How the balance is computed for interest purposes (ie: average daily balance or balance owing methods)
Minimum charge
Grace period (the period of time you have to pay off the balance without incurring interest)

My Card Sucks! I Want To Cancel

If after reading this you think you have one of those cards with too many fees, you can cancel it. However, there is a chance that it may reduce your credit score. Check out FICO to find out what FICO scores consider, as well as how best to understand your credit score.

To that end, you should be aware of soft and hard closes, and how they affect you.

Soft Closes

With a soft close, the charge card account company will acknowledge that you want to close out the card, but they will automatically reactivate it if charges go through. Their rationale is that they are saving you embarrassment of the card being rejected if you happen to be out shopping and inadvertently whip their card out!

Hence, a soft close will also often affect your credit score and ability to qualify for large loans later on if the lender does a credit check and sees that you have all sorts of credit available to you, but doesn’t see that the credit is soft closed.

It also makes you vulnerable to fraud, since if a professional steals your identity, they can order another card from a soft-closed account and start charging.

Hard Closes

Ensuring your account is hard closed entails a little more follow-up work, but can pay off in the end. You must first request a hard close when you are cancelling the card, and follow up with a confirming letter. In your letter, tell the credit company to report “closed by consumer” to the credit bureaus as well, and keep copies of everything.

Some issuers will refuse to do this: their policy might instead be to process a soft close first and a prescribed time period, at which point it reverts to a hard close. Find out how long that period of time is, and ensure that the account is hard closed with a letter at the end of that time.

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So your charge card account company just called offering you balance protection insurance against job loss, disability, life, or critical illness. The cost will be just pennies, calculated monthly based on your outstanding balance.

Do you take it?

The question is: have you performed an insurance needs analysis, or will you just make the decision to take the insurance based on impulse and instinct?

There are typically four different types of credit card account insurance:

Involuntary Job Loss: This pays your monthly minimum payment for a specified period of time after you lose your job through downsizing or layoffs.

Disability: Like above, your monthly minimum payment is covered for a specified time period upon becoming disabled and unable to work.

Critical Illness: Similar to above.

Life or AD&D (Accidental Death & Dismemberment): If you die, your entire credit card balance will be paid.

The cost may initially seem small at between $0.75 and $1.50 per $100 of outstanding charge card account balance each month, but in the spirit of being frugal, is that cash wisely spent?

Consider the fact that with the exception of credit life protection, this insurance doesn’t actually pay off your debt. It simply makes the minimum payments on your outstanding balance for the term of the contract. In fact, depending on the credit card account and interest charges, you may sometimes find that the balance at the end of the contract is actually higher than when the claim occurred due to compounding interest.

Are those minimum payments something that would cripple you financially in the event of an illness or job loss? The answer will be different for everybody – this is just food for thought.

Similar to individual Critical Illness, Disability, or Life Insurance policies, there are a few things that bear consideration in order to make a sound decision:

What are the terms of the policy? (For example, what are the specific definitions under which the insurance company will pay)?
What coverage do you need? If you lose that income or become ill, will minimum payments on your credit cards be of benefit to you, or do you have other funds that will suit the purpose?
What coverage to you already have? There is no point in duplicating your insurance coverage if you already have a CI policy in place.
In the case of job loss insurance, what are the exact terms? You may be surprised at the restrictions of this initially appealing option.
Is it cost effective? As a case study, let’s examine the life insurance as an example. On a $10,000 charge card balance, at $0.80 per $100 of outstanding balance, your monthly charge would be approximately $80/month. For $80/month, a 35year old non-smoking female in good health can purchase upwards of $500,000 of Term Life Insurance.
Can you cancel the policy, and under what terms? If you do decide to take it, make sure you keep all your documentation together so cancelling it when the time comes is easy.
Are you insurable? Many balance protection policies don’t require any evidence of insurability to qualify. If you have medical issues that make you a higher risk such that individual policies would either be cost-prohibitive or unavailable to you, then maybe this is just the protection you need.

On the flip side, one type of credit card insurance that you may not realize you might automatically have is travel insurance. Many charge cards feature automatic flight and travel coverage if you pay for a trip using that card. In fact, before you go out and purchase travel insurance, it bears calling your credit card account company to find out the specific terms of their coverage. You may find that you can save a few extra bucks by not having to go out and get extra travel coverage!

As with all insurance policies, take a good hard look at what you need, what you can afford, and whether the “easy option” being offered to you over the phone is going to be easy in the long run.

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A commenter on a recent article of mine on charge card account usage, suggested a follow-up post with an eye to uncovering the mysteries of credit card account rewards programs.

And in my research, I discovered it’s a murky world of points, rebates, fees, and annual percentage rates out there! A lot of it comes down to personal choice, but here is some information to aid your plight for a suitable credit card rewards program: 

Three types of rewards

There are typically three types of rewards programs: point-based, cash back, and frequent flyer miles. Some programs offer combinations of these rewards, with varying value for point redeemed.

Points-based programs involve accumulating points (based on the amount you spend), and then redeeming your points for merchandise from their catalogue. Points leave a little to be desired, since depending on what you redeem your points for you might not get a lot of value.

For example, Smart Money has an article on this topic , where they show you the Good, Bad, and Ugly of credit card rewards programs. Case in point for the ugly:

You could trade 39,200 Bank of America WorldPoints for a 30GB iPod, which retails for $249. Or you could use just 35,000 points to get a $350 check — enough to buy the iPod at your local electronics store. You’d come out roughly $100 ahead, and saved 4,200 points to use for another reward.

Gift certificates tend to be the best value for your points when flipping through the catalogue, and it is generally recommended that you stay away from the merchandise, since it is over-priced and lacking in quality. The gift certificate option also carries an added value advantage, since credit companies strike deals with the retailers to give them a deal on the gift certificates, whereas a dollar is a dollar when it comes to cheques or merchandise.

Cash back is most common, and offers quick rewards for your buck. However they can also have limitations; Some will only start to honour the money back policy once you have spent a minimum amount of cash, and yet others will cap the total amount of money they’ll reward.

Frequent Flyer Miles for airline tickets will sometimes give you the best bang for their buck, but can be a pain to redeem. Many issuers have blackout times, while others only designate a certain number of seats per flight as airline rewardable seats. If you don’t book your ticket early enough you can be out of luck, especially if you want a flight that’s commonly flown and redeemed for.

Saving for airline ticket rewards can also be tedious and take some time to accumulate for, and in this changing airline world, increasing fees and limitations could pose problems in the future. I have already noticed that one of the rewards programs I use have imposed a stipulation that if you do not use your points within seven years of the point being rewarded to your account, you lose it. So if you are saving up for a big reward (or on the flip side have accumulated tons of points over the years and haven’t used them), you may lose your chance.

Also, expect to pay out of pocket for the taxes, fuel surcharges, and other miscellaneous expenses (like a special booking charge if you redeem on the phone with an agent as opposed to online). But hey – a buck is a buck. To fly across the country (or around the world) for the cost of the taxes is rarely something to complain about.

Tips for the reward-hungry charge card user

Pay off that balance!

As stressed in my previous article and related comments, using a rewards program is for responsible charge card users. If you rack up a balance with an eye to getting rewards, and then spend the next 6 months or more trying to pay off the balance (and paying interest all the while), then the value of your rewards decreases significantly. Pay off those darn cards every month and treat your charge card like a debit card or chequebook – if you don’t have the money in your account, don’t whip out the plastic.

Don’t get sidetracked by the smaller rewards

Initially it can take time to build up a big enough balance to start redeeming for the rewards you really want. Don’t lose patience and redeem your 800 points for an item of insignificant value when what you really got the card for was airline tickets, or special gift certificates. Most rewards programs have tiered systems that offer sweeter rewards (with better value) for those with more points. Your patience in saving up will be rewarded.

Get the card for the rewards you want

If what you want is an airline ticket to Hawaii, then search for the best card to get you there. I found a program (in Canada) where flights to Hawaii required fewer points than even some continental flights, and I chose that card with an eye to getting that ticket. It took time, but my boyfriend and I are now living (temporarily) in Hawaii, and got return tickets for a total of $76 in taxes for both of us (whereas paying in cash would have been over $1,600 for both of us).

Look for bonus points

Lots of programs will offer bonus points depending on where you spend your cash or what you buy. Check online for bonus offers regularly, and spend wisely. You can often get triple the miles with a little research and effort.

Look at points conversion programs

Some programs are in cahoots with each other, and you can transfer or convert miles from one program to another. Be wary of those that charge a fee to do so, and take a close look at the conversion ratio. Sometimes they’re way out of whack such that is makes no sense to convert.

Specific programs vary from country to country (and sometimes even within regions), so I won’t go into many specifics with regards to individual program choices. It’s up to you to decide which rewards will ultimately benefit you the most. Just remember to use it wisely or else the interest fees will end up costing you more than you’re getting in rewards, and it’s a safe bet that that is exactly what the credit card companies are counting on.

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When’s the last time you saw the interest rate and fees on your charge card go down? Yes, you read that right. Down.

If you’re like most Americans, the likely answer to this question is never. Now, what if I told you that eliminating your fees and slashing your annual percentage rate by five, ten or fifteen percent is as easy as picking up the phone and dialing the number on the back of the card? Yes, seriously! Just follow these two easy steps, and you’ll be on your way to lower charge card rates and more money in your pocket!

The first step to reducing your credit card rates is to know your history. What rate are you paying now? How many years have you been with the company? Do you always make, at least, the minimum payment? Have you ever been late? This information will come in handy when asking the charge card account company for a lower rate.

The second step is to call the company, and tell them you want a lower rate. More than likely, they will tell you no the first time you ask. Why? Because the higher your rate, the more money they make! But don’t take no for an answer! If they tell you no, inform them of your positive history with the company. Remind them how you’ve been a loyal customer for 10 years, or have never paid late. If the answer is still no, ask to speak with a supervisor. If the supervisor says no, wait 15 minutes and call again. You’ll be speaking with an entirely different person.

What if they keep telling you no? Or what if you’ve been a less than stellar client? What if you haven’t paid on time or didn’t make the minimum payment? Then it’s time for the Credit Card Rate Hail Mary. Tell them that you’ve received other offers in the mail, and if they do not meet those offers you will cancel your card. (Make sure you have a few real or pretend offers to give to them as examples.)

The key to lowering your rate is to be persistent and to remember that the credit card account business is fiercely competitive. They would rather keep you as a customer than spend cash on attracting a new customer. Even if you aren’t a great customer, you should still ask for a lower rate. If you carry a balance, two or three percentage points lower on your credit card account rate can make a sizeable difference! Remember: If you don’t ask, you’ll never know.

Below is a sample script to read to the credit card account company:

“Hi, my name is __________________ . I have been a good customer for _________ years, but I’ve received numerous offers in the mail from other companies offering much lower rates. Visa/Mastercard/Discovery is offering me a _________ annual percentage rate. I want to stay with your company, but I also want a lower rate on my card. What can you do for me?”
 
These tips will also work for increasing your limit. Just replace “lower rates” with “higher limits” and “annual percentage rate” with “limit”.

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The most credit savvy among us have been able to use charge card accounts to their benefit in order to wisely and optimally save cash even while charging on their cards. If you are careful about how you use your credit card accounts, you may actually come out ahead by using them, rather than if you just stuck to cash. I’ve written about the perks of using cards before and why I prefer charge cards over cash, but this time, I’d like to share some actual strategies we can use to get the most out of our charge card accounts.

10 Tricks To Save Money Through Prudent Credit Card Account Use

1. Consolidate your credit card account debt with care.

Many consumers use a common strategy to trim what they owe on their cards: they use balance transfer charge card accounts, which offer 0% or low interest rate on the balance that is moved over, but for a limited introductory period. Make sure you perform a cost benefit analysis before executing this plan since most cards these days have a balance transfer fee (typically around 3% of your debt) that you’ll need to pay when you do the switch. You should also assess if you’ll be able to pay off your debt entirely before the promotional 0% rate period is up, in order to avoid any increases in the card rate. If you can’t make this work, it may still be worth doing a balance transfer if the new card carries a much lower annual percentage rate than your old one.

2. Use rewards cards only if you can pay your balance in full.

I’m a huge fan of charge card rewards. But to offset the rewards that they pay out, rewards cards tend to have higher annual percentage rates than regular credit cards. For instance, it would only make sense to earn American Express rewards if you intend to pay your balance in full each month, no fail.  If you can’t commit to such a schedule, then it’s better to apply for lower interest cards. 

3. Be careful about participating in credit card account arbitrage schemes.

Because of today’s more restrictive credit environment, it’s now tougher for shrewd cardmembers to execute any cash making schemes using charge cards. In the past, it was fairly easy to make cash with cards by taking borrowed funds and funneling them into a high interest savings account that sported an attractive yield. With savings accounts no longer yielding such great returns and balance transfer cards with awesome terms now dwindling in number, this strategy is no longer as lucrative as it once was. There are still consumers who play this game though, but it’s a game that requires top notch organizational skills since any misstep (say a forgotten or late payment) can cost you much more than you’d earn in this plan.

4. Pay more than the minimum and pay on time!

By simply practicing good payment habits, you’ll avoid exorbitant finance charges and penalties levied upon your account. It’s best to pay off any monthly balance in full, but if you can’t swing it, then paying more than the minimum will save you quite a bit in interest over the long term. There are also certain credit card accounts that will reward you for this type of good behavior (check out my Citi Forward charge card account review for more details).

5. Do your research before applying for a card.

Compare charge card offers before signing up for anything. Have you read the terms carefully? Based on your shopping habits, you’ll find that there are certain credit card accounts that will suit your spending patterns better than others.

6. Don’t own too many cards.

I’d avoid collecting rewards cards simply because owning too many may prevent you from optimizing your rewards on any one card. Also, having too many cards may just encourage you to charge more than you should and to overuse your credit.

7. Avoid relying on charge cards to cover an emergency.

Some people I know don’t have emergency funds and end up relying on their collection of credit card accounts to bail them out whenever the need arises. However, with no savings, you’re likely going to keep a balance on your credit card as soon as you use it for any unexpected expenses — and keeping a balance means paying extra in interest. So keep in mind that while depending on your cards as backup is quite tempting to do, it will certainly be expensive in the long run if you charge up a storm. 

8. Carry a spare charge card account.

Here’s a great compromise: if you are interested in taking advantage of rewards, you can still own a rewards card but use it only for those items that you’ll be able to pay off completely each month. You may want to consider applying for a second card which should be of the low interest kind; this is the card that you can afford to own with a balance given its lower rates.

9. Talk to your card issuer about lowering your rate.

If you’ve got a good history as a cardmember, you may have some leverage here. When you’ve been a customer for a while, give your card company a call to discuss the possibility of cutting you a break on the rates. They’re more amenable to this type of request than you think since card companies would love to hold on to their good clients.

10. Don’t use your card for cash advances.

Avoid using any free checks that come your way that draw from your charge card account account. And try not to use your card for any form of cash advance — it’s not worth what you’ll pay for the convenience.

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